~ Investment Strategy

The Effects of QE2

It seems to be a day for finding my opinions supported. Econbrowser has an excellent summary of recent research into the effects of the Fed’s new monetary policy tools. It implies that the most plausible transmission mechanism from the purchase of Treasury bonds to improvement in the real economy is this:

Finally, the Federal Reserve’s asset purchase program could potentially have stimulated real activity by changing public perceptions about the likely longer stance of monetary policy, conventional and unconventional; for example, it may have led market participants to expect that the FOMC would respond more aggressively to high unemployment and undesirably low inflation than was previously thought. In a similar vein, initiation of the program may have diminished public perceptions of the likelihood of extreme tail events, such as deflation, potentially lowering risk premiums and increasing household and business confidence, thereby raising agents’ willingness to spend.